Is the “Southern California is unaffordable” message scaring off house hunters who could qualify to own?
Stats from the California Association of Realtors estimate that Southern California has 576,613 renting households — roughly 1-in-5 of all tenants — with the financial oomph to buy a local residence,
Now the data doesn’t tell us the thinking of this good-sized group of relatively well-paid non-owners in Los Angeles, Orange, Riverside and San Bernardino counties. But this is a demographic slice equal to 21 percent of all local renters. And it’s a flock triple the size of last year’s home sales of 181,614 in the four-county region, as counted by CoreLogic.
All these financially fit renters suggests that “affordability” isn’t the sole reason the homebuying pace has been sluggish lately. And by the way, it’s not just a regional trend: Statewide, 1.25 million renting households could own, 21% of all tenants, according to CAR’s research.
The trade group complied these affordability statistics for the Southern California News Group from economic, housing and demographic data using the Realtor’s qualification formula for first-time buyers: spending no more than 40% of household income on a fixed-rate mortgage with a 3.5% downpayment on a home that’s priced at 85% of the local medium — including the cost of taxes, home insurance and mortgage insurance.
Please note that these are more generous terms than what’s commonly discussed — notably a 20 percent down payment and 30% debt-to-income ratio. But those “traditional” home-finance goals haven’t been realistic targets — or lending limits — for first-time buyers for decades.
“In Southern California, I believe many potential homeowners are looking at median prices in excess of $600,000 and assuming that they need several hundred thousand dollars in savings in order to achieve homeownership, which is simply not the case,” said Jordan Levine, the Realtors’ deputy chief economist. “Although affordability has deteriorated, and we have a homeownership gap with the rest of the U.S., it doesn’t have to be as large as it is currently.”
Here’s how these qualified renters look by SoCal county, including the median income needed to buy with financial comfort.
Los Angeles County: 343,427 renting households could own — No. 1 statewide among the 14 large counties with 250,000 or more households — or 19% of all L.A. renters — the No. 7 share statewide. These tenant households earn more than $97,200 in annual income. By the way, this group is four times larger than the county’s 75,107 home purchases in the county for 2018.
Orange County: 54,970 renters could own — No. 6 statewide — or 12% of all O.C. renters — No. 10 share statewide. These households earn more than $138,300 annually and are 57% bigger than the 35,022 homebuyers of 2018.
Riverside County: 67,349 renters could own — No. 5 statewide — or 28% of all renters — No. 5 share statewide. These tenants earn more than $68,100 annually and are 63% larger than 2018’s 41,218 home purchases.
San Bernardino County: 110,867 renters who could own — No. 2 statewide — or 44% of all renters — No. 1 share statewide. These tenant households earn more than $48,900 a year and their count equals nearly quadruples last year’s 30,237 home purchases.
Yes, not every renter wants to buy. Some don’t have the ties to their communities that warrant committing to ownership. Others may not have the financial security to justify a purchase. It’s a good bet another slice is still searching for their dream home to own. Plus, many young adults are putting off major life changes — such as marriage, children … and homeownership.
More worrisome is that numerous polls suggest many renters are, at best, confused about home-purchasing options. A Bank of America poll last year, for example, showed 49 percent of renters thought a 20 percent downpayment was required; and 24 percent believed a “perfect” credit history was needed to get a mortgage.
Sadly, many “affordability” measurements created by the housing industry — and widely discussed in the media — can vastly overstate the cost of entry to homeownership. These indexes are based on financial math few first-time buyers would use.
That alarming messaging looks to be ballooning this renter-who-can-buy population and is likely lowering the count of actual home sales.
The home-selling industry sits in a tough spot. They must deftly juggle their own institutional needs to nudge policymakers and homebuilders to create more housing options that, in turn, would boost sales. Yet the “housing is unaffordable” spin appears to be scaring away potential house hunters with financial clout.
“A big part of our job means influencing public policy to tackle some of the paramount challenges facing not just our housing market, but our entire economy,” Levine said. “In turn, this means being honest about the shortfall of new development relative to economic and population growth and its consequent impacts on the lack of affordability.
“If we can be successful at connecting the dots, then even more people will be able to afford housing.”